INITIATING COVERAGE (February 21, 2013)
International Stem Cell Corporation
(OTCBB: ISCO, Target Price: $0.54)
We initiate coverage on International Stem Cell Corporation (ISCO) with a
price target (PT) of $0.54 per share. ISCO is a development-stage
biotechnology company focused on therapeutic, biomedical, and cosmetic
products derived from human cell technologies. ISCO has created a
proprietary technology platform for developing pluripotent human
parthenogenetic stem cells (“hpSCs”). Parthenogenetic stem cells are
similar to human embryonic stem cells (hESCs) in that they have the
potential to differentiate into various types of cell types in the human body.
However, ISCO’s parthenogenetic stem cells are created by chemically
stimulating unfertilized oocytes (eggs) – a process that does not require the
use or destruction of viable human embryos.
INVESTMENT HIGHLIGHTS
Equity | Healthcare / B i o t e c h n o l o g y
Stock Details (2/12/2013)
OTCBB:
ISCO
Sector / Industry
Healthcare / Biotechnology
Price target
$0.54
Recent share price
$0.38
Shares o/s (mn)
105.5
Market cap (in $mn)
40.1
52-week high/low
$0.64/$0.16
Source: Thomson Reuters, SeeThruEquity Research
Key Financials ($mn unless specified)
FY11
Large therapeutic market opportunity
ISCO operates in a large and very competitive market with high potential for
rapid growth. The company is initially targeting diseases of the brain, liver,
and eye – areas where cell and tissue treatment have proven effective but
where there is a short supply of safe and efficacious cells. Specifically,
ISCO developing neuronal cells for use in treatment for Parkinson’s
disease, hepatocytes for acute and chronic liver diseases, and corneal cells
to treat various degrees of corneal blindness. The company believes this
represents a potential market of $4.2bn.
Revenues
FY12E
FY13E
4.5
4.8
7.6
EBITDA
(10.9)
(8.9)
(7.6)
EBIT
(11.4)
(9.4)
(8.1)
Net income
EPS ($)
(9.6)
(10.9)
(8.1)
(0.12)
(0.12)
(0.08)
FY11
FY12E
FY13E
Source: SeeThruEquity Research
Proprietary parthenogenetic stem cells provide differentiation
We expect that ISCO’s proprietary techniques for deriving “human
parthenogenetic stem cells” (hpSCs) may provide the company a
competitive differentiation versus peers. The company has a broad
intellectual property portfolio with over 130 patents and licenses across 30
patent families. ISCO’s proprietary stem cell platform has been shown to
exhibit pluripotency and the proliferative benefits of embryonic stem cell
technologies but with reduced immune rejection. Additionally, the derivation
of hpSCs does not require the destruction of a human embryo, as is the
case with human embryonic stem cells – mitigating some of the ethical
issues with the technology. Along with the potential to become any humanbody cell, each hpSC can be an immune match for millions of people, which
is impractical for hESCs, where each stem cell line is unique.
Key Ratios
Gross margin (%)
35.7
30.0
30.0
EBITDA margin (%)
NM
NM
NM
Net margin (%)
NM
NM
NM
P/Revenue (x)
8.8
8.3
5.3
EV/EBITDA (x)
NM
NM
NM
EV/Revenue (x)
8.4
7.9
5.0
Source: SeeThruEquity Research
Current revenue from Lifeline Skin Care and Lifeline Cell Technology
ISCO has developed two wholly-owned subsidiaries which leverage the
company’s human cell culture experience and proprietary stem cell Share Price Performance ($, LTM)
technology platform and are currently generating revenue: Lifeline Skin
Care and Lifeline Cell Technology. Lifeline Skin Care manufactures and
0.70
markets a line of anti-aging skin care products based on extracts derived
0.60
from pluripotent human parthenogenetic cells. Lifeline Cell Technology
0.50
produces and markets primary human cells and the reagents needed to
culture and study human cells for therapeutic research. Over the trailing
0.40
twelve months these businesses has generated $4.4mn in revenue for
0.30
ISCO. Management is optimistic that over time they may be able to offset a
meaningful portion of the cost of therapeutic development costs or
0.20
potentially generate value on their own.
0.10
Initiate coverage with a price target of $0.54
0.00
Our analysis indicates a fair value estimate of $0.54 per share (detailed on
pages 8 and 9), implying an upside of 41.0% from the recent price of $0.38.
Pricing at this level suggests a P/Rev of 7.5x FY13E revenue, reflecting a
discount compared to the mid-range average P/Rev multiple of peers.
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Source: Thomson Reuters
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
1|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
SUMMARY TABLE
Figure 1. Summary Table (As of February 12, 2013)
Share data
B/S data (As on 3Q12)
Key personnel:
Recent price:
$0.38
Total assets:
7.1mn
Chairman, CEO:
Andrey Semechkin Ph.D.
Price target:
$0.54
Total debt:
0.3mn
CFO, Secretary:
T. Linh Nguyen
52-week range:
$0.64/$0.16
Equity:
0.2mn
EVP, Business
Simon Craw Ph.D.
Average volume:*
223,463
W/C:
2.2mn
Development:
Market cap:
40.1mn
ROE '12E:
NM
External IR:
Book value/share:
$0.08
ROA '12E:
NM
Cash/share
$0.02
Current ratio:
2.1
Dividend yield:
0.0%
Asset turnover:
0.6
Risk profile:
High / Speculative
Debt/Cap:
0.5
MZ Group
* three month average volume (number of shares)
Estimates
Valuation
FY December
Rev ($mn)
EBITDA ($mn)
EPS ($)
P/Rev (x)
EV/Rev (x)
P/E (x)
2011
4.5
(10.9)
(0.12)
6.5x
8.4x
NM
1Q12A
1.1
(2.6)
(0.05)
7.3x
8.8x
NM
2Q12A
1.1
(2.3)
(0.03)
6.9x
9.0x
NM
3Q12A
1.2
(2.0)
(0.02)
7.0x
8.0x
NM
4Q12E
1.5
(2.0)
(0.02)
5.5x
6.3x
NM
2012E
4.8
(8.9)
(0.12)
6.9x
7.9x
NM
2013E
7.6
(7.6)
(0.08)
5.3x
5.0x
NM
2014E
10.6
(6.3)
(0.06)
4.3x
3.6x
NM
2015E
13.3
(5.2)
(0.04)
3.8x
2.9x
NM
Source: SeeThruEquity Research
INVESTMENT THESIS
We view International Stem Cell Corporation (ISCO) as an interesting development stage biotechnology
company with high growth potential over time considering current commercial and future therapeutic
applications derived from its proprietary stem cell technology platform. Stem cell technology involves
developing human cells or tissues derived from a single precursor cell to replace damaged cells in humans.
The company aims to use its advancements in human stem cell technology to become a leader in
regenerative medicine by using cell-based therapies to treat disease.
Based in Carlsbad, CA, ISCO has developed a proprietary technology platform for creating human
parthenogenetic stem cells (“hpSCs”) by activating unfertilized oocytes (eggs) through chemical means.
This process results in a non-viable “parthenote” from which pluripotent parthenogenetic stem cell lines can
be derived. ISCO has 47 employees and maintains manufacturing facilities located in Oceanside, CA and
Frederick, MD, which are specifically designed for the derivation clinical-grade parthenogenetic stem cell
lines. The company intends to continue to expand its collection of parthenogenetic stem cell lines by
creating and banking new clinical-grade hpSC lines at its 3,000 square-foot Oceanside facility. These lines
will be used both internally and for future licensing opportunities, and will be developed according to good
tissue practices (GTP) and current good manufacturing practices (cGMP).
Like human embryonic stem cells (hESCs), hpSCs are pluripotent (they have the potential to differentiate
into various types of cell types in the human body); however, hpSCs have potentially less ethical risk given
that they do not require the use or destruction of a viable human embryo. Additionally, ISCO’s proprietary
stem cell platform is distinguished by having reduced immune rejection, which, if proven effective, may
position it as a more economical path for stem cell development than other stem cell options, per the
following table.
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
2|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
Figure 2. Overview of benefits to parthenogenertic stem cells
Immune Matching
Economic Source
Genes Manipulated
Parthenogenetic
Stem Cells
Embryonic Stem
Cells
iPS Stem Cells
Yes
Impractical – each
line is unique
Individual only
No
No
Yes
Superior
Superior
Deficient
Adult Stem
Cells
Individual
only
No
Use of Viruses
Use in Genetic Diseases
Deficient
Carries Defective Gene
Source: Company investor materials, SeeThruEquity Research
Given the benefits of ISCO’s parthenogenetic stem cells, we believe there may be an opportunity for ISCO
to license its technology in the future. Currently the University of Wisconsin’s Wisconsin Alumni Research
Foundation (WARF) maintains a commanding hold of key embryonic stem cell intellectual property and
generates significant income from licensing its broad patent portfolio through its subsidiary, the WiCell
Research Institute. WiCell is a non-profit subsidiary focused on advancing progress in human embryonic
stem cell research and unlocking the therapeutic potential of the field by licensing its IP to businesses and
academic institutions. Since its inception, WiCell has fulfilled more than 1,543 licenses for stem cells, which
have been shipped to more than 908 researchers in 39 countries and 40 states. WiCell has been criticized
by private industry as being an expensive gatekeeper of seminal stem cell intellectual property. If ISCO has
success with its initial parthenogenetic therapeutic applications we believe the company has the potential be
in a position to provide an alternative to WARF for stem cell technology, which could generate licensing fees
and potential royalty income from licensees in the future. We have not incorporated this assumption in our
model, but will monitor developments in this area in the future. We would view 2015 as the earliest time that
ISCO would be able to license its technology, given existing timelines for its therapeutic products.
Large opportunities available for therapeutic applications
Initially ISCO plans to focus its therapeutic research on applications for diseases of the brain, liver, and eye.
These are areas in which cell and tissue therapies have been proven effective but where there is insufficient
supply of safe and efficacious cells or tissue for treatment. The company’s three priority areas are:
Parkinson’s disease, inherited / metabolic liver diseases, and corneal blindness. Collectively these
applications represent a $4.2Bn opportunity, per the following table.
Figure 3. Overview of ISCO parthenogenetic therapeutic applications
Application
Medical Need
Market Potential
Stage
Parkinson’s
Disease
1mn sufferers / 60K diagnosed
per year in the US
Approximately $2.2Bn
Pre-Clinical
Metabolic Liver
Diseases
Rare diseases often fatal
Approximately $1Bn
Pre-Clinical
Cornea Tissue
Implants
10mn worldwide in need of
transplant
Approximately $1Bn
Basic Research
Source: Company investor materials, SeeThruEquity Research
Parkinson’s disease: ISCO’s initial area of focus is Parkinson’s disease, a neurodegenerative disorder
which affects over 5mn people worldwide. Currently, there is no cure available for Parkinson’s disease,
except for medications that control the symptoms of the disease. ISCO recently announced positive 12week results its in vivo preclinical disease study to demonstrate the therapeutic benefits of neuronal cells
derived from human parthenogenetic stem cell (hpSC) lines in a rat model of Parkinson’s disease.
ISCO’s stem cell therapy is a one-time application and, if successful, may replace the dead neuronal cells
(70% of which are often found upon diagnoses). ISCO plans to initially target the U.S. market, which has
more than 1mn people suffering from Parkinson’s and represents a $2.2Bn market opportunity with no
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
3|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
pluripotent stem cell competition. Upcoming catalysts for this application include results from an on-going
non-human primate efficacy study, which are expected to be released in 1H13, and the company’s
preparation for its Investigational New Drug (IND) applications, which is expected to be filed in early 2014.
Liver Disease: ISCO is also developing parthenogenetic cells for a number of rare metabolic liver diseases.
According to the American Liver Foundation, one in ten people are affected by liver disease, and the only
effective treatment currently for people with liver failure is full or partial organ transplantation, expensive
procedures which can cost about $0.6mn per person. Notably, the demand for liver transplants far exceeds
the number of organs available. Currently there are nearly 17,000 people on the waiting list for a liver
transplant in the US and only about 1/3 of the people on this list are likely to receive a liver. Considering
these factors, there is a need for an alternative treatment that can be made available to a greater population.
ISCO is using parthenogenetic stem cells to develop hepatocyte-like cells (HLCs). Hepatocytes are the
main tissue of the liver, representing over 70% of the liver’s cytoplasmic mass. ISCO, which it hopes will
develop into an alternative to transplantation of primary hepatocytes. In February ISCO recently released
positive animal safety and efficacy results from a pre-clinical study in which it implanted HLCs in rodents
with a well-established animal model of a congenital liver disorder associated with bilirubin metabolism. The
study indicated that the HLCs produced a significant initial decrease and long-term stabilization of bilirubin
levels in blood serum.
Corneal Disease: Corneal disease is another application for ISCO’s human parthenogenetic stem cells.
Although there is a mature market for corneal transplants in the U.S., there are 10m people worldwide in
need of corneal transplants. ISCO plans to focus on developing markets such as India and China where
6mn people are in need of corneal transplants. As organ donation is uncommon in developing nations, the
supply of corneal tissue remains low. ISCO’s ability to assemble corneal tissue in laboratory will help the
company tap the potential $1bn market. The company and a leading Indian eye hospital are collaborating
for pre-clinical and clinical development, and we expect the company to pursue partnership and/or licensing
opportunities to commercialize a cornea product for India to address this large opportunity.
Therapeutic timeline
We believe there are several key milestones on the horizon for ISCO’s development of therapeutic products
for brain, liver, and cornea diseases, per the following graphic, which was provided by the company. In our
opinion, successful progress developing applications for the company’s human parthenogenetic stem cell
platform has the potential to increase the value of the business because it demonstrates the value of ISCO’s
proprietary stem cell technology platform.
Figure 3. Near-term therapeutic milestones
Source: Company filings, SeeThruEquity Research
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
4|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
Near-term revenue from growing Lifeline subsidiaries
In addition to its therapeutic pursuits, ISCO is generating revenues through two wholly-owned operating
subsidiaries, Lifeline Skin Care and Lifeline Cell Technology. Together these businesses generated $4.4mn
in revenue over the last four quarters, and management has high growth expectations for both. Lifeline Skin
Care manufactures a line of anti-aging skin care products based on extracts derived from pluripotent human
parthenogenetic stem cells. This is currently a $2mn business which is distributed online, through
international distributors, and through strategic partners such as Miraval, Marriott, and the Four Seasons.
Lifeline Cell Technology is a business-to-business research products company that manufactures and
markets over 120 products including human primary cells, media, and reagents.
These businesses have attractive margins and over time may be able to generate enough cash to reduce
the amount of external capital needed for ISCO to develop its therapeutic products. We estimate that the
Lifeline subsidiaries combined would need to be generating $17-20mn in annual revenue in order to fully
offset research and development investment in ISCO’s therapeutic stem cell applications. Lifeline Cell
Technology announced in 4Q12 that it would sell its human cell products through Fisher Scientific’s online
catalog as an Encompass Preferred Supplier. This has the potential to open up sales opportunities for ISCO,
as the partnership will provide the company access to large pharmaceutical companies, which typically
purchase R&D supplies using preferred supplier agreements. Simultaneously, ISCO’s wholly owned
subsidiary SkinCare, which sells anti-aging skin care products, entered into an agreement with Sinopharm
Group to sell its product in China. With a market worth $8bn growing at 10% per year, leveraging upon the
clinical network of Sinopharm Group will provide significant boost to the company’s sales.
Equity to fund operations
ISCO has a weak balance sheet and needs to raise additional capital. The company has a burn rate of
approximately $600,000 per month and only $2mn of cash on hand. ISCO management owns 29% of the
company and has invested in the business to continue to fund its operations. In aggregate the management
team has invested approximately $16mn in ISCO. Currently the company has filed an S-1, which could be
used to raise approximately $15 in gross proceeds in common equity and warrants. Additionally, the
company has a commitment with Aspire Capital to raise up to $25mn in equity, subject to price limitations,
which it may use to fund operations if necessary. As of December 5, 2012, ISCO has sold Aspire Capital
9.3mn shares of common stock for aggregate proceeds of $5.9mn and may sell Aspire Capital up to an
additional $19.1 of common stock in the future.
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
5|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
COMPETITIVE LANDSCAPE
The US is the largest market for biotechnology products with more than 1,300 firms in the biotechnology
industry. Medical biotechnology is the largest component of the industry with focus on unmet medical needs
in diseases such as cancer, diabetes and HIV/AIDS. According to IMS Health, medicines derived from
biotechnology were valued at $67bn in 2010. Biotechnology is an evolving industry with 25% of drugs in
either trial phases or awaiting FDA approval.
Stem cell technology is an important area of innovation and growth for the biotechnology industry. The stem
cell market is divided into the following segments: cell-based treatments; umbilical cord blood banking; and
use of stem cells to determine the efficiency and safety of new drugs developed using other methods. Stem
cell research focuses on exploring areas of diseases such as Parkinson’s disease, amyotrophic lateral
sclerosis, cardiovascular diseases, and several arterial diseases for replacing damaged cells with stem cells.
Despite the controversies surrounding stem cell research, the field continues to thrive in the US. In 2011, the
National Institutes of Health (NIH) funded approximately $1.2bn for stem cell research with $123mn devoted
specifically for human embryonic stem cells. Furthermore, as per market research firm
companiesandmarkets.com, the global stem cell industry is expected to grow from $410mn in 2008 to
$2.68bn by year-end and thereafter to $5.1bn.
ISCO has prioritized research on Parkinson’s disease, along with liver cells and corneal tissue transplant.
The company’s competitors in stem cell therapies include Genzyme Corporation, Stem Cell, Advanced Cell
Technology, and Viacyte. In the skincare market, ISCO faces competition from Obagi, SkinCeuticals,
SkinMedica, and Murad. Given the potential opportunity for stem cell therapy, competition is expected to
intensify in the coming years.
When compared to small to mid-range peers, the main point of differentiation is that ISCO has a patented
technology that provides pluripotent parthenogenetic stem cells without destroying the embryo, as well as
provides immune-matching for millions of people. This provides ISCO a competitive edge over peers.
Figure 2. ROA vs. Gross Margin – ISCO vs. Peers
size of bubble indicates market cap
Neuralstem
Advanced Cell Technology
Geron Corporation
120
Osiris Therapeutics StemCells
80
Pluristem Therapeutics International Stem Cell Corporation
100
Obagi Medical Products 60
40
Neostem 20
Aastrom Biosciences
-­‐300
-­‐250
-­‐200
-­‐150
ROA %
-­‐100
%
n
ig
ra
m
s
s
o
r
G
0
-­‐20
-­‐50
0
50
Source: Company filings, SeeThruEquity Research
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
6|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
FINANCIALS AND FUTURE OUTLOOK
Revenue/Drivers
We expect ISCO’s product revenue to grow from $4.8mn in 2012E to reach $13.3mn in 2015E due further
commercialization of Lifeline Skin Care products in Asia and growth in Lifeline Cell Technology from
relationships with large distributors such as Fisher Scientific. We expect that a presence in Fisher Scientific’s
online catalogue as an Encompass Preferred Supplier will widen the company’s reach to sell to
pharmaceutical companies that have preferred supplier agreements, thereby driving sales. Additionally,
ISCO is in preclinical stages for the treatment of three diseases using stem cells. In our opinion, it is likely
that ISCO will seek licensing deals for its technology in the Phase I or Phase II stage. Our forecast assumes
Phase I and Phase II occur during FY14 - FY17. Given the uncertainty of drug development and potential
value for licensing deals, for valuation purposes we have modeled that the company brings its treatments to
commercial development, with a risk factor at each stage of development. Assuming ISCO is able to
successfully bring its target therapeutics products to commercialization, we have modeled the combined
revenues from these treatments to expand at a CAGR of 44% to $1.1bn in 2030E from $85.5mn in 2023E.
Note that since ISCO is a development stage biotechnology company, we have assigned probability ratings,
or risk factors, to our forecast of each application, which substantially reduces the value ascribed to the out
year forecasts discussed above. We believe it is more likely that ISCO will seek a licensing partner for each
clinical application of its technology than bring each product to commercialization.
Margins/Expenses
During 2012–15, we expect cost of sales for the product segment (as a percentage of product revenue) to
decline from 30% in 2012E to 29% in 2015 and decline thereafter to 27.5%. We note that gross margins in
the Lifeline Skin Care segment are higher than Lifeline Cell Technology, and thus overall margins could be
affected by mix. During the same period, we expect continued investment in R&D expenses, which we
expect will grow from $3.6mn in 2012E to $5.5mn by 2015E accounting for the various trial expenses related
to stem cell therapies. Assuming successful approval and commercialization of stem cell-based therapies,
we assume their cost of production would range between 40–50% (as a % of revenue) during 2023–27 and
to stabilize at 35% thereafter. We expect ISCO to generate operating losses through commercialization of its
stem cell therapies, though management has indicated that it believes combined Lifeline revenue levels of
$20mn could cover the cost of therapeutic product development.
Balance Sheet
ISCO has a weak balance sheet with cash on hand of approximately $2mn and a cash burn of $0.50$0.65mn per month. ISCO raised $4.9mn through preferred stock issued during 9M12 and recently raised
an additional $2mn in an equity investment funded by management. We note that ISCO management has
now invested over $16mn of personal capital into the business and owns nearly 30% of the company. At
present the company has filed an S-1 seeking to raise up to an additional $15mn in equity and warrants, and
we expect that ISCO will continue to seek to raise capital in the future. We expect ISCO will require at least
another $8mn of additional capital to fund operating expenses through the filing of its IND application for a
treatment for Parkinson’s disease in 1H14. We believe the company will continue to require significant
capital investment beyond this stage in order to fund further trials. We view partnership and license
opportunities as well as the Lifeline subsidiaries as potential sources of capital in the future but have
assumed the company is funded through equity raises for our model.
Figure 3. Key Performance Indicators of ISCO, FY13E–18E
90% 30 60% In USD mn 20 30% 10 0% 0 -­‐30% 2013E 2014E 2015E 2016E 2017E 2018E -­‐10 Revenue Opera?ng Income Net Income 2014E 2015E 2016E 2017E 2018E -­‐60% -­‐90% Gross Income 2013E Gross Margin Opera?ng Margin Net Margin Source: Company filings, SeeThruEquity Research
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
7|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
VALUATION
We have valued ISCO using two different valuation methods; DCF and Peer Group Valuation. Our blended
valuation, combining the two methodologies mentioned above, yields a fair value of $0.54/share,
representing an upside of 40.8% from the recent price of $0.38 as of February 12, 2013.
DCF
We use NPV approach as it best captures the valuation of biotechnology companies, especially those with
drugs under development. With drugs for Parkinson, liver and cornea diseases in trial phases, we do not
expect any revenues from them. We expect revenue for Skincare and Lifeline subsidiary to slowly pickup in
coming years and revenue from the various drugs to begin from 2023. However for these drugs, we have
incorporated risk factor (or probability) at each trial stage and then discount the after-tax, risk-adjusted cash
flow at a weighted average cost of capital of 14.5%. Furthermore, we assume a terminal growth rate of 2.0%
at the end of our forecast year (i.e. 2030), and thus arrive at a fair value of $0.59.
Figure 4. Discounted Cash Flow Analysis
$’ 000
FY13E
FY14E
FY15E
FY16E
FY17E
FY18E
Revenue
Revenue
Revenue
Revenue
Revenue
Revenue
Revenue
7,583
10,554
13,309
16,075
18,971
22,609
Costs
6,276
7,425
8,514
9,683
10,936
12,483
784
1,877
2,877
3,835
4,821
6,076
Pre-clinical
Phase 1
Phase 1
Phase 2
Phase 2
Phase 3
A. Product Sales
Net Cash Flow
B. Parkinson’s Disease
Revenue
-
-
-
-
-
-
3,120
3,329
3,569
3,846
4,109
4,402
(3,120)
(3,329)
(3,569)
(3,846)
(4,109)
(4,402)
100%
92%
68%
68%
31%
31%
(1,872)
(1,838)
(1,448)
(1,560)
(758)
(813)
Pre-clinical
Phase 1
Phase 1
Phase 2
Phase 2
Phase 3
-
-
-
-
-
-
3,120
3,329
3,569
3,846
4,109
4,402
(3,120)
(3,329)
(3,569)
(3,846)
(4,109)
(4,402)
100%
92%
68%
68%
31%
31%
(1,872)
(1,838)
(1,448)
(1,560)
(758)
(813)
Pre-clinical
Pre-clinical
Phase 1
Phase 1
Phase 2
Phase 2
-
-
-
-
-
-
3,120
3,329
3,569
3,846
4,109
4,402
(3,120)
(3,329)
(3,569)
(3,846)
(4,109)
(4,402)
100%
100%
92%
68%
68%
31%
After tax risk adjusted cash flows
Total cash flows after tax
and adjustments
Discount Factor
(1,872)
(1,997)
(1,970)
(1,560)
(1,667)
(813)
(4,831)
(3,795)
(1,989)
(846)
1,637
3,638
0.99
0.87
0.76
0.66
0.58
0.51
DCF
(4,803)
(3,296)
(1,509)
(561)
948
1,840
Costs
Net Cash Flow
Phase completion probability
After tax risk adjusted cash flows
C. Liver Disease
Revenue
Costs
Net Cash Flow
Phase completion probability
After tax risk adjusted cash flows
D. Corneal Disease
Revenue
Costs
Net Cash Flow
Phase completion probability
Terminal Value
564,359
PV of Terminal Value
56,424
Total NPV
107,939
Fully diluted shares (mn)
183,023
Fair value per share ($)
0.59
Summary conclusions
Key assumptions
DCF FV ($ per share)
0.59 Beta
Current price ($ per share)
0.38 Cost of equity
Upside (downside)
55.2% Cost of debt (post tax)
Implied P/E
N/A WACC
Implied Price/Revenue(2013E)
8.2 Terminal Growth Rate
1.2
14.5%
0.0%
14.5%
2.0%
Source: SeeThruEquity Research
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
8|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
Figure 5. Sensitivity of Valuation – WACC vs. Terminal Growth Rate
Terminal growth rate
(%)
WACC (%)
13.5%
14.0%
14.5%
15.0%
15.5%
1.0%
0.59
0.57
0.56
0.55
0.54
1.5%
0.60
0.59
0.58
0.57
0.56
2.0%
0.62
0.60
0.59
0.58
0.57
2.5%
0.63
0.62
0.60
0.59
0.58
3.0%
0.65
0.64
0.62
0.61
0.59
3.5%
0.67
0.65
0.64
0.62
0.61
Source: SeeThruEquity Research
Peer Group Valuation
We compared ISCO with its peers in the biotechnology industry such as Geron Corporation, Neuralstem,
Inc., StemCells, Inc., Neostem Inc., Aastrom Biosciences, Inc., Advanced Cell Technology, Inc. among
others, under the market multiple approach. Our NPV valuation of $0.59 per share implies estimated
revenue of $0.09 in 2013E and a forward P/S of 7.45, indicating ISCO would be trading at a discount relative
to the list of selected peers.
We arrived at a fair value of $0.50-$0.52 per share based on EV/Revenue and P/Revenue multiples of
selected peers. We considered a target multiple of 6.85x for the EV/Revenue multiple and 2013E revenue of
$7.6mn to arrive at a fair value of $0.52 per share. Similarly, we used a P/Revenue multiple of 6.90x to the
2013E Revenue forecast of $0.07/share, we arrive at a fair value of $0.50 per share.
Figure 6. Comparable Valuation
EV/Revenue(x)
Price/Revenue(x)
Mkt cap
($ mn)
FY12E
FY13E
FY12E
FY13E
Geron Corporation
222.3
47.6
32.6
86.9
59.5
Neuralstem, Inc.
81.6
nm
nm
nm
nm
StemCells, Inc.
65.5
29.2
21.4
40.5
29.7
Neostem Inc.
101.2
3.0
6.3
2.7
5.7
Aastrom Biosciences, Inc.
61.3
nm
nm
nm
nm
Athersys, Inc.
53.1
5.2
3.0
3.4
2.0
Advanced Cell Technology, Inc.
133.7
na
na
na
na
Obagi Medical Products, Inc.
232.3
1.8
1.7
1.9
1.8
BioTime, Inc.
178.6
45.8
na
43.1
na
Osiris Therapeutics, Inc.
324.1
24.8
15.2
28.0
17.2
Pluristem Therapeutics Inc.
212.4
nm
nm
nm
nm
Cytori Therapeutics Inc. (USA)
164.1
18.0
8.1
17.2
7.8
10.5
6.9
10.6
6.9
7.9
5.0
6.9
5.3
(25.0%)
(26.7%)
(35.4%)
(23.3%)
Company
Average
ISCO
Premium/ (discount)
40.1
Source: SeeThruEquity Research
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
9|Page
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
RISK CONSIDERATIONS
Emerging company
ISCO is an early stage company with a history of losses and no prospects for earnings in the near future as
it uses its resources to identify and develop potential therapeutic products. The company’s therapeutic
products are still in a pre-clinical stage, have not been tested on humans, and will require significant
research, development, and testing before they can achieve regulatory approval. Human trials can be very
difficult to design and implement. Additionally, this process is costly, can take a significant amount time to
achieve, and will require ISCO to raise additional capital. The company’s revenue-generating subsidiaries
are also in early stages of development and would require several years of profitable growth, in our view, to
fund ISCO’s therapeutic drug pipeline development.
Liquidity
ISCO has limited financial resources and will likely need to find additional sources of liquidity in the future.
The company indicated that its monthly burn rate was $675,000 as of September 2012, comprised of
$600,000 of operating expenses and capital spending and patent costs of $75,000. Although ISCO
generates revenue through its Lifeline Skincare and Lifeline Technologies subsidiaries, we believe that it will
be many years before ISCO will have self-funding operations even assuming continued growth in these
businesses.
Going Concern
ISCO’s auditors expressed a “going concern” opinion in its 2011 audited financial results. The going concern
opinion expressed doubt as to the company’s ability to continue as a going concern without raising
additional capital. Additionally, this opinion may make it more difficult to raise capital on good terms.
Regulatory
As a biotechnology company ISCO operates in a highly regulated industry. The process for regulatory
approval of drug development by the FDA and other regulatory authorities is lengthy, uncertain and
expensive. Additionally, ISCO’s focus on human cell therapy increases the degree of scrutiny it faces.
Although ISCO’s focus is parthenogenetic stem cells derived from unfertilized oocytes, certain aspects of
that work may involve the use of embryonic stem cells. Research utilizing embryonic stem cells is
controversial, and currently subject to intense scrutiny, particularly in the area of the use of human
embryonic material. Federal law prohibits the use of federal funds for creation of parthenogenetic stem
cells, and there is risk that the company could be subject to legislative or administrative action in the future
by groups opposed to the development of human embryonic cell research, which could limit, delay or
prevent the company’s product development.
Competition
ISCO operates in an extremely competitive field of biotechnology focused on cell therapy and stem cells.
While ISCO appear to have achieved early differentiation by focusing on therapeutic properties of “hpSC”
(human parthenogenetic stem cells), we expect that the company will be competing against fully integrated
and more established pharmaceutical and biotechnology companies, many of whom have more resources
available and better distribution than ISCO.
Dilution
ISCO has a significant amount of preferred stock outstanding. The company has issued Series A, Series B,
Series D, and Series G preferred stock. These classes of preferred stock include voting rights, including the
right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The company has 5,300,043 shares of preferred stock
outstanding convertible into 30,973,200 shares of common stock. Additionally, ISCO has 6.9mn warrants
and 39.6mn options and restricted stock outstanding for a total of 183mn potential shares outstanding on a
fully diluted basis.
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
10 | P a g e
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
Technology
Although ISCO believes it has a strong portfolio of patents and technology licenses, many pharmaceutical,
biotechnology and other companies, universities and research institutions have filed patent applications or
have been issued patents relating to cell therapy, stem cells, and other technologies potentially relevant to
or required by ISCO’s expected products.
Additionally, ISCO relies in part upon licenses form third parties, which have payment obligations or
obligations to pursue commercial products under the licensed patents. If the company loses access to
license rights it could result in costly or time-consuming litigation or potentially the loss of the licenses, which
would likely have a severe negative impact on ISCO’s business.
Management Team
Andrey Semechkin, PhD.,Chief Executive Officer and Co-Chairman of the Board
Dr. Andrey Semechkin is Chief Executive Officer of International Stem Cell Corporation. He is a specialist in
system analysis, strategic planning and corporate management. He is a member of the Russian Academy of
Sciences and has been Deputy Director of Institute of System Analysis since 2004. Professor Semechkin
was awarded the Russian Government Award in Science and Technology in 2006 and has written several
scientific books. He has over 20 years of experience creating and managing businesses across different
industries and scientific sectors.
Linh Nguyen, Chief Financial Officer and Secretary
Ms. Linh Nguyen is Chief Financial Officer of International Stem Cell Corporation. She has over 18 years of
experience in financial management. She served as chief financial officer of International Lottery &
Totalizator Systems (ILTS), a publicly-traded global software and system developer of lottery and optical
scan voting systems, where she was a member of the executive leadership team executing strategic
initiatives, formulating policies and assessing financial viability of business opportunities. During her tenure
at ILTS, Ms. Nguyen held various other roles, including director of finance and finance manager. Prior to
ILTS, Ms. Nguyen held accounting positions with Phamatech, Osmonics, Academic Communication
Associates, and AMN Healthcare Services. Ms. Nguyen earned a Master of Science in Executive
Leadership from University of San Diego and B.S. in Business Administration with a concentration in
Accounting, from California State University, San Marcos.
Simon Craw, PhD., Executive Vice President of Business Development
Dr. Simon Craw serves as Executive Vice President of International Stem Cell Corporation. He obtained his
PhD in Chemistry from the University of Manchester and began his academic career at the University of Rio
de Janeiro followed by positions at the University of Sydney and the University of Manchester. He has over
eighteen years experience in research and development as well as operations and information technology at
Merck, Astra-Zeneca and Novartis and as head of R&D Informatics and Regulatory Operations at ACADIA
Pharmaceuticals. Dr. Craw’s has numerous scientific publications and frequently speaks at international
conferences
Ruslan Semechkin, PhD., Vice President of Research and Development, Board Member
Dr. Ruslan Semechkin serves as Vice President of Research and Development for International Stem Cell
Corporation. Dr. Semechkin was trained in medical genetics, stem cell biology and international business
administration and holds an MS degree from Faculty of Fundamental Medicine of Moscow State University.
He earned his PhD degree in Physiology from Anokhin Research Institute of Normal Physiology, Russian
Academy of Medical Sciences. Dr. Semechkin is a well known speaker on stem cell biology, including the
use of stem cells for neurology and skin regeneration. He has publications in the field of clinical and
molecular biology, and is author of various patent applications.
Donna Queen, President of Lifeline Skin Care Inc.
Donna Queen serves as President of Lifeline Skin Care Inc, a wholly owned subsidiary of International Stem
Cell Corporation. Ms. Queen has over twenty years experience as a marketing executive. Prior to joining
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
11 | P a g e
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
ISCO, Ms. Queen was President and CEO of ZO SKIN HEALTH® by Zein Obagi, MD. Dr. Obagi is the
dermatologist who created the original Obagi Nu-Derm skincare system, which has since become the
leading physician-dispensed brand of anti-aging skincare. Earlier Ms. Queen founded and led one of
Virginia’s largest advertising and marketing agencies, specializing in aesthetic and dermatological marketing
and brand development.
Francisco Bustamante, President of Lifeline Cell Technology, LLC
Mr. Bustamante has over eighteen years of experience in Operations of Biotechnology companies. His
experience includes senior management positions in the areas of manufacturing, procurement, planning,
warehousing, distribution and project management. Mr. Bustamante has an excellent understanding of the
manufacture and logistics of cell culture products, biological instruments, molecular biology kits and
diagnostics. He has led key projects in the areas of manufacturing resource planning (MRP) systems
implementation, ISO compliance and product development. His industry experience includes Clonetics,
BioWhittaker (Cambrex), Digene and Meso Scale Diagnostics. Mr. Bustamante received his BS degree in
Biology from the University of San Diego and his MBA degree from Frostburg State University. He has been
with Lifeline Cell Technology since 2007.
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
12 | P a g e
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
FINANCIAL SUMMARY
Figure 7. Income Statement
Figures in $mn unless specified
Revenue
FY10A
FY11A
FY12E
FY13E
FY14E
1.6
4.5
4.8
7.6
10.6
13.3
189.0%
6.5%
57.2%
39.2%
26.1%
1.6
1.4
2.3
3.2
3.9
YoY growth
Cost of sales
Gross Profit
Margin
Operating expenses
EBIT
Margin
EBITDA
Margin
Other income/ (expense)
0.7
FY15E
0.8
2.9
3.4
5.3
7.4
9.4
53.8%
64.3%
71.0%
70.0%
70.0%
71.0%
11.3
14.3
12.7
13.4
14.2
15.4
(10.5)
(11.4)
(9.3)
(8.1)
(6.9)
(5.9)
NM
NM
NM
(106.2%)
(65.0%)
(44.4%)
(10.2)
(10.9)
(8.8)
(7.6)
(6.3)
(5.2)
NM
NM
NM
(99.9%)
(59.4%)
(38.9%)
(2.3)
2.2
(0.0)
0.0
0.0
0.0
(12.7)
(9.2)
(9.3)
(8.1)
(6.9)
(5.9)
0.0
0.0
0.0
0.0
0.0
0.0
(14.3)
(9.6)
(10.8)
(8.1)
(6.9)
(5.9)
NM
NM
NM
(106.2%)
(65.0%)
(44.4%)
(12.2)
(6.1)
(8.6)
(5.1)
(3.5)
(2.4)
NM
NM
NM
(67.1%)
(33.3%)
(18.2%)
(0.18)
(0.08)
(0.10)
(0.05)
(0.03)
(0.02)
FY10A
FY11A
FY12E
FY13E
FY14E
FY15E
Current assets
7.6
3.0
4.9
3.9
5.2
6.9
Intangibles
1.0
1.3
1.6
1.6
1.5
1.4
Other assets
1.3
1.4
1.3
1.7
2.2
2.6
Total assets
9.9
5.7
7.8
7.2
8.9
10.9
Current liabilities
4.5
2.1
2.0
2.5
3.0
3.4
Other liabilities
0.0
0.0
4.9
4.9
4.9
4.9
Shareholders’ equity
5.4
3.6
0.9
(0.2)
1.0
2.6
Total liab and shareholder equity
9.9
5.7
7.8
7.2
8.9
10.9
Profit before tax
Tax
Net income
Margin
Adjusted Net income
Margin
Adjusted EPS ($ per share)
Source: SeeThruEquity Research
Figure 8. Balance Sheet
Figures in $mn, unless specified
Source: SeeThruEquity Research
Figure 9. Cash Flow Statement
Figures in $mn, unless specified
FY10A
FY11A
FY12E
FY13E
FY14E
FY15E
Cash from operating activities
(6.9)
(7.0)
(7.5)
(8.7)
(6.9)
(5.6)
Cash from investing activities
(0.6)
(0.9)
(0.7)
(0.8)
(0.9)
(1.1)
Cash from financing activities
12.6
3.5
9.8
7.0
8.0
7.5
Net inc/(dec) in cash
5.1
(4.4)
1.6
(2.5)
0.2
0.8
Cash at beginning of the year
0.7
5.8
1.3
3.0
0.5
0.7
Cash at the end of the year
5.8
1.3
3.0
0.5
0.7
1.5
Source: SeeThruEquity Research
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
13 | P a g e
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
About International Stem Cell Corporation
International Stem Cell Corporation (OTCBB: ISCO) is focused on the therapeutic applications of human
parthenogenetic stem cells (hpSCs) and the development and commercialization of cell-based research and
cosmetic products. ISCO's core technology, parthenogenesis, results in the creation of pluripotent human
stem cells from unfertilized oocytes (eggs) hence avoiding ethical issues associated with the use or
destruction of viable human embryos. ISCO scientists have created the first parthenogenetic, homozygous
stem cell line that can be a source of therapeutic cells for hundreds of millions of individuals of differing
genders, ages and racial background with minimal immune rejection after transplantation. hpSCs offer the
potential to create the first true stem cell bank, UniStemCell. ISCO also produces and markets specialized
cells and growth media for therapeutic research worldwide through its subsidiary Lifeline Cell Technology
(www.lifelinecelltech.com), and stem cell-based skin care products through its subsidiary Lifeline Skin Care
(www.lifelineskincare.com). More information is available at www.internationalstemcell.com.
© 2011-2013 SeeThruEquity, LLC. Important disclosures appear at the back of this report.
14 | P a g e
International Stem Cell Corporation
Equity | Healthcare / Biotechnology
February 21, 2013
CONTACT:
Ajay Tandon
Director of Research
SeeThruEquity, LLC
www.seethruequity.com
(646) 495-0939
[email protected]
Jay Albany, CFA
Senior Vice President, Equity Research
SeeThruEquity, LLC
www.seethruequity.com
(646) 495-0939
[email protected]
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15 | P a g e